An adjustable-rate mortgage (ARM) is a home loan that starts with a low fixed-interest rate for a limited period of time (between a few months to 10 years), then the rate changes at the end of that starting term.
The rate will change (adjust) according to market rates at that time. That rate–and so your payments–could be higher or lower than your starting rate, depending on whether market rates are rising or falling.
Uncertainty about future interest rates is what makes many people shy away from ARMs, especially in a market with rising rates.
When does an ARM make sense? If market interest rates are in a stable or generally falling trend, an ARM might save you thousands of dollars. For example, a payment could start at $2,100 and then drop to $1,950. On the other hand, if market rates rise, the payment could go to $2,200 or more. Still, if you’re paying a lot less at first, then that might offset the later higher payments (especially if you manage your money wisely by saving for the possibility of increased payments). You also can convert your ARM to a fixed rate mortgage at some point, though with high fees.
When doesn’t it make sense to use an ARM? If you’re right on the edge of qualifying for the price of the home, an ARM might not be a wise financial decision. If rates go up, you could find yourself in a financial bind. Also, if rates are rising now, what is the likelihood they’ll rise more? It’s a gamble that causes many people a lot of stress. Can you imagine 20+ years of uncertainty?
Before approving you for an ARM, your lender will do a stress test to see if you qualify at a higher payment to make sure you can afford it if rates rise. Contact me for a referral to a great local lender who can answer your questions. henrywattsrealestate1@gmail.com or (718) 399-3320